Public finances for the half year: expenditure up but so are tax revenues. At least one of these trends cannot persist.
Tech profits through the roof = corporate tax take up. There's a surprise.
Jim Power
EXCHEQUER RETURNS (JANUARY-JUNE 2021)
As was the case in 2020, the deterioration in the public finances in the first half of 2021 is due to Covid-related expenditure rather than weakness in tax revenues. Covid is continuing to have a dramatic impact on Government expenditure and the public finances.
The persistently high level of Covid restrictions that Ireland has been subjected to, and continues to be, is having a profound impact on the public finances. The legacy of this borrowing and the associated build-up of debt will have profound implications for spending and taxation policy in this country for years to come.
In any cost-benefit analysis of Ireland’s ongoing stringent approach to Covid, the immediate impact on the public finances is crucial, but the longer-term implications for expenditure on, and delivery of, public services such as health and education has to be a key consideration.
The Exchequer returns for the first 6 months of the year show that the Exchequer recorded a deficit of €5.3 billion, which was €32 million better than the equivalent period in 2020. On a 12-month rolling basis, which is regarded as a better indicator in these Covid times, a deficit of €12.3 billion was recorded.
The 2 key themes that continue to stand out in the Exchequer finances are that tax revenues are proving very resilient, and the pressure on public expenditure remains intense.
· Total tax receipts during the month of June were 12.8 per cent or €662 million ahead of June 2020.
· In the first 6 months of the year, total tax receipts were 9.8 per cent higher than the first half of 2020, equivalent to almost €2.6 billion.
· Income tax receipts continue to perform very strongly, up 15.8 per cent on the first 6 months of last year, equivalent to €1.7 billion. Notwithstanding the Covid impact on the labour market, the quality of employment in the economy and the very progressive nature of the income tax system are delivering very buoyant income tax returns. It is also the case that in June 2020, tax warehousing was introduced, which exaggerates the year-on-year increase in June this year.
· VAT receipts are 21.7 per cent ahead of last year, equivalent to €1.3 billion. VAT-related activity is rebounding very strongly. As an example, data from the SIMI show that new car registrations in the first 6 months of the year were 20.8 per cent higher than last year, when car dealerships were shut down for a large part of the period. In the first 5 months of the year, the value of retail sales was 17.9 per cent ahead of the same period in 2020. When car sales are excluded, the growth rate was a more modest 3.2 per cent. However, in May, the value of sales increased by 47.3 per cent as non-essential retail was allowed re-open.
· Customs receipts are continuing to perform strongly, largely due to Brexit.
· Corporation tax receipts in the first half of 2021 were 2.6 per cent lower than 2020. €398 million of corporation tax receipts were withheld in the first half of the year to make payments under the Covid Restrictions Support Scheme (CRSS). The underlying situation is that Corporation tax receipts are continuing to perform strongly. In a podcast some weeks back we pointed out that global tech earnings are performing very strongly and that this would be reflected in Irish corporation tax receipts during 2021. This is indeed happening.
Tax Revenues January-June 2021
Source: Department of Finance, Fiscal Monitor, July 2nd 2021.
The real pressure on the public finances is on the expenditure side of the accounts. In the first half of this year:
· Total net voted expenditure at €32.3 billion, was €415 million or 1.3 per cent ahead of the first half of 2020. Net voted current expenditure at €29.9 billion was 2.2 per cent or €644 million ahead of the first half of 2020.
· Health spending at €9.6 billion was €95 million lower than last year and accounted for 29.9 per cent of total net voted expenditure.
· Social protection expenditure at €9.96 billion was €329 million ahead of last year, and accounted for 30.8 per cent of total net voted expenditure.
· Exchequer debt servicing costs in the first half of 2021 totalled €3.17 billion, which was €452 million lower than the first half of 2020 despite higher levels of borrowing and debt. This is indicative of the importance of low Government bond yields and the impact of ECB bond buying. These policies will have to remain in place for the foreseeable future in order to protect the precarious fiscal position of many countries, including Ireland.
At the end of 2020, the public debt to GDP ratio stood at 59.5 per cent, up from 57.4 per cent at the end of 2019. It is expected to reach 66.6 per cent at the end of 2021. The debt to modified gross national income (GNI*) ratio, which is the more realistic measure of economic activity, stood at 106 per cent at the end of 2020, up from 95.6 per cent at the end of 2019. This is projected to reach 114.7 per cent at end of 2021. In monetary terms, the public debt amounted to an estimated €218.2 billion at the end of 2020, up from €204.2 billion at the end of 2019. This is equivalent to €44,000 for every person resident in the State. This is amongst the highest in the developed world and is expected to increase to €47,700 by the end of 2021, with public debt projected to reach €239 billion.
The persistently high level of Covid restrictions that Ireland has been subjected to, and continues to be, is having a profound impact on the public finances. The legacy of this borrowing and the associated build-up of debt will have profound implications for spending and taxation policy in this country for years to come.